Here's How I'd Play Alibaba Stock Now

A certain group of shareholder had been beaten severely. I mean October was rough. Maybe rougher for U.S. listed Chinese stocks. I speak of Alibaba (BABA) stake holders. Those folks watched BABA bottom at a 17 month low this past Tuesday. You have seen the analysts that cover this name. Over the past week or 10 days, analysts at TH Data Capital, Nomura, MacQuarie, Benchmark, and Oppenheimer had all cut their price targets for this name, several five star analysts among them by the way.

Well gang, Alibaba reported the firm's second quarter results this morning. The firm comfortably beat earnings expectations. Revenue, though up 54% year over year, did actually fall short of consensus view. The firm also cut their FY 2019 guidance to a range of $375 billion to $383 billion. This is versus what had been projected as a rough $395 billion, but has not really been taken poorly at all by the Street. The stock has been all over the place since early Friday morning, and is still flirting with last night's closing level as I bang out this note.

Why?

My thought is that Wall Street expected more from Alibaba. Not more revenue, but more in the way of reduced guidance going forward. Given the obvious decline in the rate of economic growth in Alibaba's domestic market of China, and the ongoing trade conflict between the U.S. and China that had put further pressure on Chinese markets... this guidance has been seen as optimistic by many.

As with some U.S. firms, such as Amazon (AMZN) and Microsoft (MSFT) , a key concern for investors is growth in cloud computing. For Alibaba, that growth printed at 90% year over year to $825 million. Impressive, but the revenue driver remains e-commerce. That slice of the business produced revenue of $10.6 million, good enough for growth of 56%, and representative of 85% of the entire Alibaba pie. Mobile monthly active users grew 5%, reaching 666 million versus an expected 634 million.

What I Think

After months of pain, this name finally broke out of a solid Pitchfork model. We suddenly saw upward momentum changes for the daily MACD, Relative Strength, and Money Flow. The breakout, however was halted precisely at a 38.2% Fibonacci retracement of the June through October selloff. This suggest nearly complete algorithmic control of the action in this security.

While that stinks for block traders, it makes the stock somewhat more predictable... unless I'm wrong. Then, I want you to forget this article. My thought in the issue is that there may be a Friday afternoon attempt to re-enter the Pitchfork from the upside. Therefore I would not buy this stock today above $147, or sell it below $155 (50 day SMA). There is, however, more than one way to skin a cat. (I would never skin a cat, it's an expression.)

Volatility Play (minimal lots)

Would you pay $120 for BABA? The stock now trades at $150. Would you sell this name at $180? Alibaba will report earnings again in February 2019. Now some may call this risky, but let's take a look. A trader could....

-Sell one February $120 put (last $2.95)

-Sell one February $180 call (last $2.82)

The very idea here is the premium capture that comes to a credit of $5.77, or in minimal lots... $577. Now, should the stock end up running (it did run 30 bucks over the past three months), the risk is that this trader may end up having to buy 100 shares at $120 (net basis: $114.23), or sell 100 shares at $180 (net basis $185.77). Interesting idea.